1. Chapter 8 Business Strategy and Competitive Advantage in Different Industry Contexts Copyright © 1999 by Harcourt Brace & Company All rights reserved. Requests for permission to make copies of any part of the work should be mailed to the following address: Permissions Department, Harcourt Brace & Company, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777. Bourgeois, Duhaime, & Stimpert

2. Copyright © 1999 by Harcourt Brace & Company All rights reserved Chapter Objectives t Describe characteristics of emerging industry environments and special challenges they pose for firms seeking to develop a competitive advantage in those industries. t Describe the advantages and disadvantages associated with first- and second-mover strategies, and identify some of the factors that are essential to success in emerging industry environments.

3. Copyright © 1999 by Harcourt Brace & Company All rights reserved Exhibit 8.1 : Industry Life Cycle Demand Time Emerging Growth Maturity Decline

4. Copyright © 1999 by Harcourt Brace & Company All rights reserved Chapter Objectives (cont.) t Examine challenges associated with achieving and maintaining competitive advantage in mature industry contexts and describe specific ways to improve competitiveness in mature industries. t Compare and contrast the characteristics of manufacturing and service businesses and describe the challenges of achieving and maintaining competitive advantage in both industries.

5. Copyright © 1999 by Harcourt Brace & Company All rights reserved Competition in Emerging Industries t Industry environments are constantly in flux. © Managers must decide whether their firms should be a first-mover. Whether their firms should be the first to seize and exploit new market opportunities or whether their firms should wait until another, pioneering firm has entered the market. Managers sometimes have no choice.

6. Copyright © 1999 by Harcourt Brace & Company All rights reserved Exhibit 8.2: Model of Strategic Management

7. Copyright © 1999 by Harcourt Brace & Company All rights reserved Value of First-Mover and Second-Mover Strategies t Not always desirable to be first-mover. © Does not guarantee competitive advantage. t Advantages of first-movers: © Most important: positive reputational effect with customers. © Can be recognized as particularly innovative firms which can positively influence customers’ perceptions of products/services. © Have first opportunity to move along learning curve.

8. Copyright © 1999 by Harcourt Brace & Company All rights reserved Value of 1st-Mover and 2nd-Mover Strategies (cont.) t Disadvantages of first-movers © Will sometimes offer products/services that are poorly designed or defective. © Might also launch new products with inadequate marketing or promotional efforts. © Sometimes customer demand is so strong that first- movers are unprepared to handle it.

9. Copyright © 1999 by Harcourt Brace & Company All rights reserved Value of 1st-Mover and 2nd-Mover Strategies (cont.) t Second-movers have opportunities due to mistakes of first-movers. © They can “piggyback” on the efforts of first- movers, while avoiding much of the initial costs R&D, marketing and advertising, and costs associated with opening distribution channels.

10. Copyright © 1999 by Harcourt Brace & Company All rights reserved Value of 1st-Mover and 2nd-Mover Strategies (cont.) t Factors which characterize the dynamic industry contexts in which these decisions must be made: © Ambiguity of emerging markets Uncertainty of customer demand. Lack of industry infrastructure typical of established industries. Lack of industry standards. © Product life cycles can be very short PCs: 4-6 months CT scanners: less than 2 years

11. Copyright © 1999 by Harcourt Brace & Company All rights reserved Value of 1st-Mover and 2nd-Mover Strategies (cont.) t Importance of three factors for successful 1st- and 2nd-movers: © Dominant design Much of firm’s success depends of this. –Chrysler and their minivan in 1982. © Imitability The more difficult to imitate, the better. © Interconnectedness of product requirements and company resources.

12. Copyright © 1999 by Harcourt Brace & Company All rights reserved Exhibit 8.3: 1st- and 2nd- Movers in Various Industries

13. Copyright © 1999 by Harcourt Brace & Company All rights reserved NutraSweet: A Successful 1st-Mover t Developed in 1965 by Searle when health concerns were raised about cyclamates. © Proved to be “right product at right time.” t Patents expired in 1992, but company continues it dominance. © Difficult to imitate (exclusive raw material supply contract). © Company resources interconnected very well to product requirements.

14. Copyright © 1999 by Harcourt Brace & Company All rights reserved Challenges of Mature Industry Environments t Unattractive characteristics of mature industry environments. © Stagnant demand and excess capacity. Firms anticipate increasing demand. –Capacity expands faster than actual demand. –Invites price competition. © Exit barriers. Instead of being eliminated, certain production assets are allowed to remain due to the reluctance for restructuring charges or large write-offs.

15. Copyright © 1999 by Harcourt Brace & Company All rights reserved Exhibit 8.4 : Industry Life Cycle Demand Time Excess Capacity Demand Capacity

16. Copyright © 1999 by Harcourt Brace & Company All rights reserved Challenges of Mature Industry Environments (cont.) © Lack of innovation. As demand slows, managers stop investing in product/process innovations. Has several consequences –Reinforces customers’ perception that industry offers nothing new that would warrant a replacement purchase. –Products and services appear more and more to be commodities. © Pressure from new entrants. Entrepreneurial managers see opportunities for offering new products or using new technologies.

17. Copyright © 1999 by Harcourt Brace & Company All rights reserved Challenges of Mature Industry Environments (cont.) t Ways to improve attractiveness of and achieve competitive advantage in mature industries: © Benchmarking and its usefulness in developing and maintaining competitive advantage. Defined as comparing and measuring a firm’s business processes against the best practice of those processes by any organization in any industry in the entire world. Object is to accelerate organizational learning so that performance breakthroughs can be achieved.

18. Copyright © 1999 by Harcourt Brace & Company All rights reserved Exhibit 8.5: Benchmarking: A Continuous Learning Process Time Performance Continuous Improvement Breakthrough Improvement Continuous Improvement Organizational Learning Performance Improvement

19. Copyright © 1999 by Harcourt Brace & Company All rights reserved Challenges of Mature Industry Environments (cont.) Steps in benchmarking –Break down its operations into discrete value-adding activities/processes (value-chain)

20. Copyright © 1999 by Harcourt Brace & Company All rights reserved Challenges of Mature Industry Environments (cont.) Steps in benchmarking (cont.) –After identifying discrete value-adding processes, measure those processes and compare the firm’s performance against the best practice of any firm in the world. Objectives from any benchmarking effort: –Firm will obtain set of metrics that contrast its performance process with best practice. –Firm should gain tangible ideas about how it can dramatically improve its own performance. See Exhibits 8.7 & 8.8

21. Copyright © 1999 by Harcourt Brace & Company All rights reserved Challenges of Mature Industry Environments (cont.) The greater the differences or disparity between the focal firm and the firm being benchmarked, then the greater the need for learning and innovation on the part of the focal firm. © Rethinking the value chain. Reconsidering which links add or could add value and which links are unlikely to contribute to development of competitive advantage.

22. Copyright © 1999 by Harcourt Brace & Company All rights reserved Challenges of Mature Industry Environments (cont.) © Product innovation. Provide features /attributes that deliver more value. Have remarkable record of revitalizing mature markets. –Automobiles –PCs © Process innovation. Can be more valuable than product improvements. –Gillette and its Sensor razor. –Lincoln Electric focuses on processes that decrease manufacturing costs.

23. Copyright © 1999 by Harcourt Brace & Company All rights reserved Challenges of Mature Industry Environments (cont.) © Process innovation (cont.) JIT production Modular designs

24. Copyright © 1999 by Harcourt Brace & Company All rights reserved Competition in Manufacturing and Service Industries t The revolution in manufacturing. © Increasing competition © Productivity improvement © Benchmarking and value chain analysis © Re-engineering and outsourcing © Quality

25. Copyright © 1999 by Harcourt Brace & Company All rights reserved Competition in Manufacturing and Service Industries (cont.) t The growing service sector, the nature of service work, and the problem of service productivity. © Services cannot be inventoried. © Personal nature of the service “encounter.” Based more on perceptions and other less-objective tangible factors.

26. Copyright © 1999 by Harcourt Brace & Company All rights reserved Competition in Manufacturing and Service Industries (cont.) © Challenges in automating or improving efficiency of services. Cannot use the same techniques as manufacturing firms to improve productivity. Rarely improved by reducing employee headcount.

27. Copyright © 1999 by Harcourt Brace & Company All rights reserved Competition in Manufacturing and Service Industries (cont.) t Improving productivity of service work. © Bundling or cross-selling. Involves exposing customers to broader array of company’s service offering. –Example: bank services. © More effective use of organizational knowledge and learning. Example: use of bar codes in retailing operations. © Reorganize firms’ structures to eliminate inefficiencies and bottlenecks.

28. Copyright © 1999 by Harcourt Brace & Company All rights reserved Competition in Manufacturing and Service Industries (cont.) t Chains, franchising, and competitive advantage in service industries. © Tremendous growth over last 30 years in chains and franchise operations. © Blamed for homogenization of our cities. Mall in Detroit would have many of same stores as mall in Portland, Oregon. © Many authors blame chain stores and franchising for loss of many small, unique, locally-owned enterprises.

29. Copyright © 1999 by Harcourt Brace & Company All rights reserved Competition in Manufacturing and Service Industries (cont.) © Positive observations of chains and franchises. Likely to be an important part of our economic landscape for many years. They enjoy several economic and strategic advantages over other forms of businesses: –Example: economies of scale in purchasing, distribution, and marketing. Almost ideally designed to promote organizational learning. –Duplication of successful concepts.

30. Copyright © 1999 by Harcourt Brace & Company All rights reserved ConclusionsConclusions t Importance of managerial thinking and organizational learning in developing effective business strategies. © Development of competitive advantages requires managers to do more than select an appropriate generic strategy. © Responsibility of managers of firms operating in these different industries to acquire necessary knowledge to formulate and implement appropriate strategies.

31. Copyright © 1999 by Harcourt Brace & Company All rights reserved Key Points Introduced in Chapter 8 t Managers of firms operating in emerging industries face several challenges. © Great deal of ambiguity and uncertainty. © Short industry and product life cycles. t Neither first- nor second-mover strategies are necessarily optimal for firms operating in emerging industries. © Both have advantages and disadvantages.

32. Copyright © 1999 by Harcourt Brace & Company All rights reserved Key Points Introduced in Chapter 8 (cont.) t Ways to improve competitiveness in emerging industries: © Producing products and services that become dominant in industry. © Producing products and services or developing processes and capabilities that are difficult for competitors to imitate. © Possessing important interconnected assets. t Managers of firms in mature industry environments also face difficult challenges:

33. Copyright © 1999 by Harcourt Brace & Company All rights reserved Key Points Introduced in Chapter 8 (cont.) © Stagnant demand and excess capacity. © Exit barriers. © Lack of innovation that makes products and services less attractive to customers. © Competition from new entrants. t Managers of firms in mature industries can take several steps to develop and maintain competitive advantage: © Benchmarking. © Rethinking the value chain. © Product and process innovation.

34. Copyright © 1999 by Harcourt Brace & Company All rights reserved Key Points Introduced in Chapter 8 (cont.) t Close management attention, appropriate use of technology, and development of organizational routines and standard operating procedures can lead to major improvements in service sector efficiency and productivity. t One of most important reasons why chains and franchises have enjoyed great success is their ability to accumulate, store, and apply organizational learning to enhance efficiency and productivity.